Thursday, March 01, 2007

Outsourcing Insurance Operations

No doubt you’re well aware of an increasing trend to re-deploy certain insurance operations using outsourcing vendors. Customer support functions, including claims handling, general policy inquiries and many back office processes are being relegated to these service providers, allowing insurers to focus on what they do best: create new products, market them and drive new premium. The evolution of (and consequent cost reductions afforded by) telecommunications and the increasing sophistication of supply-chain management has made it far easier for a company to implement an outsourcing strategy – regardless of whether the provider is in Bayonne or Bangalore. This “first generation” outsourcing has been going on for many, many years, though it only recently gained widespread attention as jobs began shifting overseas. The point of this article is not to advocate offshoring, rather to provide some insight on new outsourcing models that mark the continuing progress of supply chain management, all facilitated by better, faster and cheaper communications and compounded by the experiences of years gone by.

That next generation of outsourcing – the “second generation” – encroaches on more highly-skilled domains, and, as such, is not without its critics. However, the economies an insurance company can derive by intelligently supplementing existing internal operations with a vendor who operates with greater efficiency surely validates the strategy – especially in an industry where small gains in net margin amount to substantially increased income.

Take for example the state filings process. Traditionally an internal function, over the past several years more insurers have begun realizing that professional service firms focused exclusively on managing the filing process for multiple insurers simply have evolved better procedures, greater efficiencies and, as a result, more cost-effective operations. Further, the market cycles that betray the insurance industry are more easily weathered, as the inevitable force reductions that accompany softening markets can be addressed simply by scaling back the outsourcing vendor’s services.

Product research is another great example. Imagine the tedium of collecting rate filings from fifty states, digitizing and indexing them for easy access and archiving them all in a massive searchable database. Better, access an existing database from a vendor who manages the continuous updating and maintenance and provides access on a pay-per-use basis.

Finally, there’s technology selection. The process of identifying the appropriate vendor for a major systems overhaul is daunting. The selection process alone can take a year or more; implementation can take several years more. Between the requests for information, requests for proposal, product demonstrations, requirements gathering, project management, training and ongoing support, systems implementations – especially those for critical processes like policy issuance or claims handling – weigh heavily on an organization. Bringing in a firm that has deep knowledge of leading vendors’ systems and the processes they enable can shave months or years from the process.

Outsourcing insurance operations support can help insurers focus on what they do best, concentrating their efforts on the premium generation and customer-facing processes that separate competitors. Outsourcing makes sense; outsourcing judiciously, with an understanding of those areas most suitable for it, makes profit.

Post a Comment

Links to this post:

About Me

Rob Berg is a Principal and Director of Management Consulting for Perr&Knight and editor of the prestigious Journal of Insurance Operations. For the past 15 years, Rob has advised or led senior management teams through major process improvement initiatives and technology implementations. Formerly COO of a major retail marketing firm, Rob built robust operations that supported three consecutive years of triple-digit growth during his tenure.